Could the move to introduce contingency fees in Victoria change the class actions landscape in Australia?

In a move hailed by some as a ‘game changer’, the Victorian State Government is considering taking steps to lift the ban on plaintiff lawyers charging contingency fees in the context of group proceedings, leading to speculation that the Victorian Supreme Court may become the preferred forum for class action proceedings.[1] 

In this article, we give an overview of the proposed amendments, and also offer our take on the reforms. 

The proposed amendments 

The Justice Legislation Miscellaneous Amendments Bill 2019 (Bill) was tabled in the Victorian Parliament on 27 November 2019. The Bill proposes amendments to the Supreme Court Act 1986 which, if passed, will allow plaintiff lawyers to claim a percentage of the amount recovered in a successful group claim as their costs payable in the proceeding. 

The amendments will empower the Supreme Court of Victoria to allow these contingency fee arrangements (which are referred to in the Bill as ‘group costs orders’) where it is satisfied that it is appropriate or necessary to ensure justice is done in the proceeding. 

The proposed amendments will also make plaintiff lawyers liable to pay any costs ordered to be paid to the defendant in the proceeding. The Court may also order the plaintiff lawyers to give security for the defendant’s costs in the proceeding. The broader prohibition on contingency fees would remain in place under the proposed reforms.

The Bill has received its second reading in the Victorian Parliament and debate has been adjourned until 4 February 2020. 

Extensive debate

The Bill is the government’s response to the Victorian Law Reform Commission (VLRC)’s recommendation in March 2018 to lift the ban on contingency fees. Similar recommendations were made by the Productivity Commission in 2014 and the Australian Law Reform Commission (ALRC) in December 2018. These developments come after extensive debate about whether lawyers should be able to charge contingency fees and the limitations of litigation funding as a means of providing access to justice. 

One longstanding view in Australia has been that contingency fee arrangements may catalyse unethical practices and see an erosion of lawyers’ professional independence. Those opposed to the introduction of contingency fees have argued that allowing a lawyer to effectively purchase an interest in the outcome of litigation will create fertile ground for conflicts to occur between a lawyer’s duty to serve the best interests of their client and their own commercial interests. 

It has also been widely argued that even where these fee arrangements do not give rise to a real conflict, allowing lawyers to charge on this basis will nevertheless create a public perception that lawyers lack the independence and objectivity that is essential to their professional integrity.

Proponents of contingency fees have challenged this traditional view, arguing that lifting the ban on contingency fees will not result in the diminished integrity of the legal profession and is necessary to provide an alternative source of funding to that offered under litigation funding models. 

Those in favour of contingency fees have argued that lawyers are adept at managing the risk of conflicts which they say exist in any form of legal billing. They argue that lawyers who charge on a conditional ‘no win, no fee’ basis have a stake in the outcome of litigation which could give rise to a conflict and that time-based billing may create an incentive for inefficiency. In this regard, the Law Institute of Victoria has welcomed the move to introduce contingency fees saying that it will encourage ‘value-based billing’ where legal costs are determined by the amount recovered in a successful proceeding rather than by reference to billable units. 

It has also been argued that even the tripartite relationship between plaintiff, lawyer and funder (which is designed to facilitate funding while preserving the ability of lawyers to advocate for their client’s case independently of any direct interest in the claim) can itself create a setting in which complex conflicts of interest arise.

The introduction of the Bill is a response to the perception that there is over-reliance on litigation funding to facilitate access to justice for claimants without the financial resources to pursue meritorious claims. There is a view that litigation funders have been too discerning in their selection of cases for funding, favouring investor and shareholder class actions to the exclusion of other claims which involve higher risk and lower value. In particular, it has been argued that the litigation funding model has not met demand among SMEs for business-to-business claims or claims involving vulnerable plaintiffs. On this basis, proponents of the introduction of contingency fees have argued that allowing these fee arrangements will provide greater access to justice by providing a source of funding for claims which funders have typically considered too risky or otherwise uncommercial. 

Litigation funders and access to justice

The extent to which the proposed reforms will increase access to justice will depend on how plaintiff lawyers respond to the changes and their appetite for risk. When deciding whether to represent class members on a contingency fee basis, will law firms approach their cost/risk analysis in a substantially different way to litigation funders? 

If law firms prove to be as discerning in case selection as most litigation funders, it is difficult to see how the introduction of contingency fees will achieve the purpose of improving access to justice. In this regard it is noteworthy that even though the use of contingency fees has been permitted in England and Wales since 2013, there has been limited use of these fee arrangements there. 

There is also a question about the extent to which some law firms have the capacity to carry the costs of litigation on behalf of class members without the support of third party funding. Will the use of contingency fee arrangements be limited to large, well-resourced firms with the capacity to effectively estimate costs and forecast the quantum of damages and who can price and carry risk? Or, will there be a new role for litigation funders as financiers to smaller firms providing interim funding until the determination of a claim? 

Plaintiff lawyers may require funding not just to cover the expenses involved in prosecuting the claim, but also to cover any security for costs that they are required to provide or the costs involved in obtaining ‘After the Event’ insurance to cover the risk of adverse costs orders. What are the costs of this finance and who will ultimately wear them? If plaintiff lawyers factor these costs into the calculation of their contingency fees, it may result in an offering that is not dissimilar to the existing litigation funding model. 

Further, as noted above, it seems unlikely that the move to contingency fees will immediately result in a more diverse selection of cases receiving funding. Plaintiff law firms may not be sufficiently incentivised by the prospect of receiving a percentage of a relatively small damages claim to accept the potentially significant risk of sunk costs, expert and counsel disbursements and adverse costs orders associated with an unsuccessful outcome. The short-term impact of the reforms may register more in the market for high value claims, such as securities class actions. 

Our take on the reforms

1. In our view, the reforms might not promote access to justice in the way envisaged. Rather than making higher risk/lower reward claims economically feasible, the dominant impact may be to increase activity in the market for high value claims such as securities class actions. That means that we might not see more claims, but we may see more competition.
2. While the reforms are likely to be good for the expected return to class members in that competition should drive down commissions, we think there would also be drawbacks for class members. Class actions are, by their very nature, large pieces of litigation. A law firm acting on a contingency fee basis will quickly find itself with a lot of skin in the game. That heightens the potential for a conflict between the interests of the class and the interests of the law firm. 
3. We think some law firms may feel pressure to reach a settlement rather than ratchet up their exposure through the conduct of a trial. That is all the more so because, historically, class actions often settle – and this might be factored into the law firm’s risk appetite. The earlier the settlement, the more economically favourable for the law firm. 
4. We wonder if some law firms may feel pressure to keep down their costs of running the trial – perhaps by briefing less experienced counsel or seeking to limit reliance on experts, or by imprudently narrowing the scope of the dispute. 
5. Those incentives might work to the advantage of defendants. It is beneficial for defendants to be opposed to a plaintiff law firm with significant incentive to settle, and settle early. It is also possible that defendant legal costs will be lower in circumstances where the plaintiff firm is incentivised to limit its own costs. That is not to say that plaintiff firms are incapable of resisting these incentives – far from it. However, defendants may prefer to face an action where these incentives are at play.
6. In the short to medium term, we may see forum shopping in favour of the Supreme Court of Victoria. If the legislation is passed, then – notwithstanding the High Court’s recent decision that common fund orders are impermissible under the Federal Court Act and the State Supreme Court Acts – law practices will be able to obtain, in appropriate cases in the Supreme Court of Victoria, common fund orders allowing them to take a proportion of the settlement or judgment. 
7. It is likely that contingency fees will be rolled out beyond Victoria. There has been speculation that some states may retain the ban on contingency fees to position themselves as more business friendly. However, in recommending the introduction of contingency fees, the VLRC noted the importance of a consistent national approach. Given that the ALRC has recommended the introduction of contingency fees in the Federal Court, it seems likely that other states will follow suit. The High Court’s decision on common fund orders may provide some added impetus to do so. That means that any spike in group claims commenced in the Supreme Court of Victoria may be short lived.
8. Before plaintiff firms rush to commence in Victoria, there may be some issues to resolve arising out of the High Court’s decision on common fund orders. Constitutionality of the contingency fee reforms is unlikely to be an issue,[2] but the language in the Victorian Bill is modelled in part on the language of the legislation that was considered by the High Court. In particular, the Bill requires the Court, before making a contingency fee order, to be satisfied that the order is ‘appropriate or necessary to ensure that justice is done in the proceeding’. The comments of the majority of the High Court may call into question whether the Court can be satisfied of that matter. Their Honours considered that ‘an application for a CFO is centrally concerned to determine whether the proceeding is viable at all’ and is ‘not apt to ensure that justice is done in the proceeding’. The context, purpose and subject matter of the legislation is very different, but it is something that will need to be thought through before the Bill is passed into law.

There is no doubt that the tabling of the Bill represents a significant step away from the traditional view in Australia that contingency fees are bad for the integrity of the legal profession, and we expect that contingency fees will be introduced in other Australian jurisdictions. However, it remains to be seen precisely how this will play out, particularly in terms of access to justice and the impact on the litigation funding landscape.